Financial Literacy for Kids: What to Do for Your Kids at Every Age (From 2- to 12-year-olds and Beyond)

“Let me please introduce myself. I’m a man of wealth and taste.”

I am listening to the Rolling Stone’s “Sympathy for the Devil” as I craft this post. Over and over again, in fact. I’m reasonably sure that I heard about this form of concentration strategy on Tim Ferriss’ podcast, but I can’t recall from which luminary interviewee. BTW, try it sometime — repeated song listening as well as the Ferriss podcast. Now, back to the Stones. In “Sympathy,” Jagger ironically embodies the devil. Listening to it now makes me think of the devilish influences that affect our children. Although the intention of marketers is hardly as insidious as some of the historical evils retold in the song, the fact that kids are being targeted by marketers at such a young age warrants our attention as parents. It stands to reason that because they’re already learning all about the power of spending as toddlers, we really should be open to initiating the money conversation earlier than our intuition might suggest. Most folks I encounter think that the ages of five or six are a good starting point. I hope you’ll stay with me through the post to see why two or three is even better.

I consider this post a bit of a working document because the research on financial literacy is by no means final. So this post may evolve to some extent, though the core tenets will undoubtedly remain in place. I’ve tried to fill it with valuable information based on experiences I’ve had with my kids and per conversations with and observations of other families. The document is intended to be practical with notes of philosophy and research, where applicable. In that vein, I’ve included summary bullets for each section if you only have time to scan.

2-4 years

Summary bullets:

Be alert to your children’s interest in money, and look for teaching moments.

Talk about money choices: Share, Save & Spend Smart.

Try Thrive by Five for easy lessons.

This is a time of introduction to money smarts and a time of “Emergent Financial Literacy,” a phrase coined by Martha McCormick and David Godstead in this terrific paper about the state of financial education for kids back in 2006. Just as we read to our kids before they can read back to us or write a word in what we now refer to as our kids’ “emergent literacy” phase, we should be talking to them about money basics (e.g. needs vs. wants, saving for goals, making choices) at this time as well. They certainly won’t know how to save for a goal at this stage. Your bigger concern might be to make sure pennies don’t end up in their bellies, but you should still start the conversation because the “spend” messages are virtually unavoidable. If you’re looking for resources, Thrive by Five is terrific because the lessons are simple and require nothing more than a short bit of time with your kid.

5-6 years

Summary bullets:

Start an allowance. $5/week for your 5-year-old will work; be explicit about why you’re giving an allowance.

Keep the conversations and money interactions as positive as possible.

Help them set their first short-term savings goal.

Give them autonomy to make their own spending decisions (within reason).

This is really where it starts to get fun because you’ll begin to incorporate allowance and goals. Fellow parent warning: Be sure to take a deep breath, and tell yourself that you’re giving them allowance to learn and make mistakes. I know from experience that it is very hard to do, but you must give them autonomy over their money. And yep, they’ll disappoint you in the short term. I’d love to tell you that my daughter saved for a Chemistry kit instead of an American Girl doll, but she didn’t. However, it was her choice, and she did learn some very valuable lessons. Every experience is foundational on some level.

Five is a good age to start an allowance. At this age, your kids are (hopefully) past the money-as-nutrition stage and are capable of understanding how to make choices with their money. As a parent, you’re in the business of helping your kids build good habits, so you’ll want to direct how the allowance “choices” are made when you start. By way of example, we began our 5-year-old with five bucks per week. This helped to condition her choices by having her deposit one dollar each into the Save and Share jars. The three additional dollars were her own. She had autonomy (There’s that word again!) over these dollars and could put them into any one of her Share, Save or Spend Smart jars. Because of this control that you’re giving your child, it’s important to be explicit as to why you’re giving an allowance. To the extent that this is helpful, here’s a script:

“We are going to start giving you an allowance. This is your own money to Share and Save and Spend Smart. [NOTE: If you’ve shown them The Money Mammals, you can tell them that they can be like Joe and his friends.] We’re doing this because we know it is important for you to learn to be smart with your money. We want you to have some fun and get comfortable using money, so you’ll be getting your very own dollars. We think this helps, and we are here to answer any of your questions about money. We may not know everything, but we can help you.”

It’s a good idea to keep it all as positive as possible.

Of course, you can help direct behaviors that you feel would be good for them to learn. One good example is an idea taken from both The First National Bank of Dad and Allowance Magic. Offer money matching for anything that they put in the Save jar to encourage that behavior. For every dollar that they put in the Save jar, including the one that you require them to put in, tell them you’ll match it with a quarter (or more if you like). This can help reinforce the concepts of “paying yourself first” and money saved can grow.

The best way to encourage saving, though, is to have them pick out a goal for which they can save. For these younger kids, you’ll want to keep the time horizon short for their first goal, such as four to eight weeks. This is long enough to learn to delay gratification but not too long that they completely lose track of their goals. To keep them focused, have them paste a picture of what they want along with the cost (+ tax). You can then refer to it when they become weak. (Scholars like Ron Burgundy maintain that this happens “around week three.”) Try to continue to let them maintain their autonomy. If they become distracted, encourage them. Point out the picture of the goal at each allowance distribution. Use a calendar, and mark off days as you get closer. Use a goal-tracking thermometer along with the picture to show them that they’re making progress.

7-9 years

Summary bullets:

Be prepared to review and adjust your allowance yearly.

Encourage them to set a bigger goal (although this may also happen naturally).

It’s a good idea to periodically review with them why you’re doing an allowance program. You can use this time (yearly or even 2x/year) to review the allowance and potentially increase it if you feel it’s warranted. For example, if they’ve been thoughtful enough about the goals they’ve chosen and they are interested in saving for something a little bigger, then go for an increase. They’re not as likely as a tween to negotiate, but don’t get flustered if they try to do that. Be proud. That’s a thoughtful kid who’s learning. This is also one heck of a good trait to have as you get older, right?

Your child now has some experience with setting goals and making simple choices with the allowance. It might be time to extend the time horizon for future goals. It is still a good idea to have them paste a picture of any new goal, whatever goal they might set. You want the reference point and to drive home the importance of visualization. For example, my daughter saved over a period of six months for a $100 American Girl doll at this age. She made the jump from a few roughly $25 goals. I was concerned it was too big of a jump, but she gamely took on the challenge. Kids surprise us at every turn, don’t they? My experience is that the Save jar will stay goal-less for periods of time, and that’s ok. Just be on the lookout with your child for opportunities to identify goals. A goal-less jar full of dollars might also be an opportunity to put some money in a bank account. (See below.)

10-12 years

Summary bullets:

Consider a transition to a digital allowance.

Add more financial responsibility: clothes, lunches, phone, etc.

Pay monthly to give them experience in dealing with the “windfall” of payday.

Allowance and financial literacy learning gets more interesting as your kids age. Have fun with it. Offer advice, don’t be afraid to share your mistakes and know that you’re making a huge difference in their lives as they continue to explore. This is also where, if they’ve been using the jar system for a few years and have had the important experience of periodically separating money into the Share, Save and Spend Smart jars, you can start them on a digital allowance. We use FamZoo. Bill Dwight, the creator and owner of FamZoo, convinced me that a digital allowance made sense after years of physical money allowance because kids eventually have to learn to deal with money in the digital domain. Doing that on the early side was very much in line with our overall philosophy, so we’ve been doing that for a couple of years. If you’re looking for more great information as your kids get older, check out Bill’s blog.

This age is a very good time to add some more responsibility. A lot of good detail about the basic logistics involved is included in Allowance Magic, which is why we include that book in our Money Mammals For Your Family Kit. Your child will get a taste of budgeting by embarking on this new journey of increased responsibility. In fact, here’s a matrix that I put together based on information my daughter drafted when we told her that she’d be responsible for birthday presents for friends, school lunches, food with friends in our local shopping and eating area and mobile phone charges.

Certain items were monthly charges (i.e.: food, phone). Others were annual and had to be “converted” to monthly amounts (i.e.: presents). I wrote about this (which I call Allowance 3.0) in a little more detail in a previous post. Our daughter still wanted to receive her allowance on a weekly basis, but we adjusted it to be delivered monthly. We wanted her to get a real-world feel akin to what life will be like when she receives a paycheck (flush with cash) and to that empty feeling many of us feel just before the next paycheck.

If you feel that your child is being irresponsible with his or her money, don’t just cut it off. Discuss what is bothering you, tell them that you’re concerned and say you want to see them act more responsibly. If it continues, give them a warning that it might be cut off. If it continues, it might be time to stop and restart again in the future. Be wary of mistaking autonomy and irresponsibility. If they are buying something you don’t like (i.e.: my personal feelings about the American Girl doll) but as long as they aren’t breaking family rules (e.g. revealing clothes or buying Patriots paraphernalia), you should try and let them make their own decisions. That’s a big part of what the allowance is all about. Yep, you guessed it … autonomy.

On the flip side, if you feel like they are prepared for it, give them some additional responsibility. I spoke with a mom whose daughter was giving her money away to friends. She wasn’t being irresponsible; it just made her feel good. You can take a look at this blog post about it here. With all the speed of a George Constanza comeback (Remember The Jerk Store?), I thought of another strategy for this mom AFTER the fact: giving her daughter some additional allowance to cover all the birthday gifts she might have to give throughout the year. This would give her more direction for the year, add responsibility and accommodate her giving nature.

On incentivizing…

Another note on incentivizing or matching. At any time in this process, you can kind of “goose” those items you think are important. For example, we match any money that our kids want to use to buy books because we want to encourage reading. We direct them to utilize the library at times, but having a nice, new book is an experience that we totally support.

On banking…

It’s a good idea to open a bank account for your kids early. When gifts come in (particularly large ones), you can put some of that money away in the account. For example, if your 5-year-old gets a $20 check, give them $10, and put $10 away. They won’t know any better. They’ll be excited when you reveal that they have an account filled with extra dollars by the time they’re eight or so. I’ve talked a lot about autonomy. (You hadn’t noticed, had you?) You’re giving them some control here, but the control should be age-appropriate. By the time they’re moving headlong into those tween years, they’ll be able to make those decisions on their own. By putting some gift money away during the younger years, you’ve modeled a behavior you’d like to see them continue. Sure, sometimes they’ll spend the whole shebang, but they may also surprise you. Of course, talking through the decisions each time the opportunity arises is a good way to ensure they remember to or at least think about the behaviors you’d like to encourage.

Onward…

Good luck, and, as always, I’d love to hear from you about your successes and your difficulties. We’re all in this together, doing our best to help raise a generation of money-smart kids, and we need to help each other.

Comments

I started my daughter on your “share – save – spend smart” regimen with your fun kit at age 5. She is now 14, and is a decent saver. But moreover, she is an EXCELLENT spender. She is able to set goals on big, big items and work towards it for a year to reach her goal purchase. There’s a bit of frivolous spending, but I feel it’s important to experience the disappointments from impulse buying as well. She budgets well for the “share” portion as well, but is being challenged because costs for presents to her teenage friends are escalating.
Thank you so very much for giving her an early start on an important real-life lesson, in such an easy and FUN way!
I’ve shared this story with other parents of small kids.
Now, I’m trying to see how I can teach my daughter about investments – any suggestions?

I was so excited to read your post and how The Money Mammals have helped your daughter. That experience that you cite is such a key and it’s wonderful that you’re giving her the opportunity to learn on her own. My own 13yo Money Mammal just started investing by finding a stock that was meaningful to her. She bought 3 shares of Adidas stock because she’s been seeing those Superstars shoes all over. Smart choice because the stock has doubled (imagine that!). The success has allowed us to expand the conversation to short- and long-term gains (she bought the stock within my brokerage account so she’d be paying at our tax rate if she sold now), buying low and selling high and, of course, the risks of buying stock. She is, of course, itching to buy more. It will be interesting to see how she reacts when a stock doesn’t do so well, but I’m just excited that she’s learning about the power of investing from an early age. BTW…I am very up front with her that I tend to focus on index funds and am not an expert when it comes to investment advice. In fact, it’s worth taking a look at the disclaimer below included for legal purposes. I wish you the best of luck with your teenager and I would love to hear back after she’s had some experience. I love hearing about stories of money-smart kids!

Disclaimer – I do not provide personal investment advice and I am not a qualified licensed investment advisor. Please your own due diligence, or consult a licensed financial advisor or broker before making any and all investment decisions.